You have been assigned to the audit of the financial statements of Office Moving and Storage Limited (OMS) for its year ending December 31, 20X2. The company started 10 years ago and is in the business of moving furniture and equipment for company offices across Canada, and also providing storage for companies requiring that service. The company is owned by three shareholders who are all involved in operating the company. OMS owns four properties outside of major urban centers’; this is where it has warehouse buildings for storing customers’ furniture and garages for parking its own moving trucks. OMS has a force of salespeople who follow commercial real estate construction and leasing reports to identify sales prospects: large and medium companies that are planning to move offices. The prospects are assigned to sales people who then follow up and try to sell a moving and storage contract to the company, along with other services to facilitate the office move. The sales-people prepare a cost quote for doing the move, and this must be approved by the regional sales manager prior to giving it to the prospect company. The regional sales managers have the authority to lower the quoted price if a competing moving company undercuts OMS’s quote. Once a move has been started, in many cases the customer requires extra services beyond those contracted for (such as extra boxes, packing, disassembling furniture, removal of trash, etc.), and these are billed as extra charges. The moving employees on the job record the types of extra services provided in a Customer Moving Job Report. These extras are then priced by the assistance sales managers, and added to the amount billed to the customer. Customers with approved credit ratings are required to pay 25% of the contracted price as a deposit, and are billed for the remaining contract cost and any extras after the move is completed. They have 10 days to pay in full. Customers without approved credit ratings are required to pay the full contract price and any extra charges in advance before the moving employees can start the move. In the preliminary audit planning done to date, your audit manager has determined that revenues are the class of transactions with the highest risk of material misstatement. You have been assigned to continue the OMS audit planning work by finalizing and documenting various risk assessment and planning decisions so the audit team can move on to developing the detailed audit plans. It is now January 20X3, and you are at the OMS offices to begin your audit work. In discussion with the company’s management, you have learned that OMS currently has about 10% of the office moving market in Canada, and typically does about 30-40 moves per month, with 40 being about the maximum number it can handle with its current employees and trucks. About 80% of its sales are on account to customers with good credit ratings, the balance of its sales is paid in advance. Starting in the current year, the company has purchased future contracts to lock in fuel prices, since fuel is a major operating expense. The company’s policy is to value these future contracts at fair value in its year end balance sheet, with unrealized gains included in Revenues, and unrealized losses included in operating costs. The company is planning to expand its operations in the next two years by acquiring another established moving company that specializes in smaller company moves. The acquisition and expansion will be financed by issuing shares to other investors who will not be actively involved in the business. Below is the December 31, 20X2 adjusted trial balance listing that you have obtained from OMS’s management:
Required: Continue audit planning for OMS based on answering the following questions: a. Identify three factors your audit firm would have had to consider in order to decide to accept the OMS audit engagement for the current year, and explain how each factor affects this acceptance decision. b. Using the trial balance data above, analyze OMS’s financial statements by calculating its current ratio and accounts receivable turnover ratio. c. What materiality levels would you use for planning this audit? Show your calculations and justify your decision. You can assume your audit firm has the following policy: Performance materiality should be 70% of the Overall Materiality level for financial statements as a whole, unless specific information indicates a different value should be used. d. What audit risk level would you be willing to accept for this engagement? Describe your choice in terms of one of these levels: low, lower, lowest. Explain the factors that support your decision. e. Based on the business risk analysis for OMS, your audit manager believes the OMS revenue class of transactions has the highest risk of material misstatement. Identify and explain three business risk factors in OMS that would support your manager’s assessment. f. Your manager has asked you to assess the inherent risk of misstatement at the assertion level for the revenues. Use the levels high, medium, or low to describe your assessments, and explain the factors that support yourassessments.